Quarterly Bulletin Winter 2003

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Quarterly Bulletin Winter 2003 Powered By Docstoc
					The distribution of unsecured debt in the United Kingdom:
survey evidence

By Merxe Tudela and Garry Young of the Bank’s Domestic Finance Division.

   The Bank recently commissioned a survey asking people about their unsecured borrowing and whether
   it is a burden to them. This article summarises the main results.(1) As of October, 34% of respondents
   had some form of unsecured debt, over and above that which they expected to pay off at the end of the
   month, and the average amount owed was around £3,500. Some people owed much more than the
   average: 26% of those with some debt owed more than £5,000. Around 10% of borrowers said that
   their unsecured debt was a heavy burden to their households, similar to earlier surveys. For purposes of
   comparison over time, the questions were based on those used in earlier surveys. The evidence suggests
   that the proportion of people with some debt has not changed since at least the late 1980s. While the
   average amount borrowed by debtors has increased, since 2000 the extra borrowing has been
   concentrated among those with household incomes above £17,500. Despite the rise in average debt
   levels in recent years, the proportion of people who consider their debt not to be a burden has increased.
   But, the amount borrowed and the share of unsecured debt accounted for by those who consider it a
   heavy burden have both increased.

The recent rapid growth in household debt has been                                 An important source of information on the financial
driven by high rates of both secured borrowing, through                            position of individual adults and households is the
mortgages, and unsecured borrowing, through personal                               British Household Panel Survey (BHPS), which since
loans, overdrafts and credit cards. While the aggregate                            1991 has asked broadly the same group of people about
stock of unsecured debt (£164 billion at end-2003 Q2)                              their economic and social circumstances. However, the
is small in relation to the stock of mortgage debt                                 most recent information on unsecured debt in the BHPS
(£714 billion) and household sector gross wealth                                   is for 2000. This was analysed in detail by Cox, Whitley
(£5,547 billion, including housing), its fast growth has                           and Brierley (2002). They found that the households
raised questions about whether an increasing number of                             with the highest levels of both mortgage and unsecured
people have borrowed more than they can easily afford                              debts tended also to have the highest levels of income
to repay. This would be more likely if unsecured                                   and net wealth in both 1995 and 2000. But they also
borrowing is increasingly concentrated among those                                 found that debt to income ratios were highest for
with relatively low incomes and few assets. Its build-up                           low-income households.
could also leave others more vulnerable to unexpected
changes in their circumstances. These possibilities                                The survey
might have implications for both monetary policy and                               In order to update this analysis, more recent evidence
financial stability. An assessment of the extent of                                has been obtained from a specially commissioned survey
current and potential problems associated with the                                 from NMG Research, that in October 2003 asked a
growth of unsecured debt requires some investigation of                            nationally representative sample of 1,950 adults about
how the debt is distributed among individual borrowers.                            their unsecured debt. Using the same questions as in
This article is solely concerned with the distribution of                          the BHPS, people were asked about the types of debt
unsecured debt and only discusses mortgage borrowing                               they had, the amounts they owed and whether they
to the extent that this is useful in distinguishing the                            considered the debt to be a burden to their
characteristics of borrowers.                                                      household.(2) A broad summary of the survey
(1) A brief summary was also reported in the Financial Stability Review, December 2003.
(2) The BHPS asked people about the total amount borrowed on a range of debt instruments, the NMG Research Survey
    also asked how much they owed on each debt instrument individually.

Bank of England Quarterly Bulletin: Winter 2003

methodology and exact wording of questions is included                                                In total, 34% of respondents have some type of
in the annex.                                                                                         unsecured debt. By instrument, 15% of respondents owe
                                                                                                      money on a credit card, 13% have a personal loan, 8%
Only 1 of interviewees refused to say whether they                                                    owe money on catalogue purchases and 7% have an
had any unsecured debt or not. But of those with debt,                                                overdraft. In general, participation varies broadly
33% did not say how much they owed. This may well                                                     positively with the level of household income for most
reflect uncertainty about the amount they owe rather                                                  types of borrowing, except DSS social fund loans, not
than a wish to conceal it. A recent survey, Citizens                                                  available to those on high incomes, and borrowing
Advice (2003), explicitly asked people whether they                                                   through catalogues and mail order, which is used at a
knew how much they owed in total on all of their credit                                               similar rate throughout the income distribution.
commitments. It found that 31% of those owing                                                         Student loans are concentrated in the lowest-income
something on credits/loans did not know how much they                                                 group, probably indicating that a high proportion of
owed. Information from the NMG Research Survey                                                        borrowers are still studying. The overall rate of
suggests that the perceived burden of debt among those                                                participation in the unsecured debt market is highest for
who do not say how much they owe is not different from                                                those with annual household income of between
that among those who do report the amount they owe.                                                   £25,000 and £34,999, around twice that for those with
On this basis, we assume that the amount owed by those                                                household income below £9,500.
who do not reveal their debt is not systematically
different from the amount owed by those who do reveal                                                 Average levels of debt by household income
it.(1)                                                                                                and debt instrument
                                                                                                      Table B sets out the average amount of debt per
                                                                                                      borrower. In total, the amount borrowed is also strongly
Table A outlines some of the key findings concerning the                                              related to household income, with average debt of
proportion of people using different methods of                                                       around £1,800 for debtors with household income in
borrowing (the participation rate). For each type of debt                                             the range £4,500–£9,499 and nearly £6,000 for those
instrument, people are asked not to include any                                                       with household income in excess of £60,000. The
borrowing that they expect to pay off in full by the end                                              exception to this pattern is for debtors in the
of the month. This is intended to exclude borrowing,                                                  lowest-income group, where average debt is £2,400,
mainly on credit cards, that is done on a temporary                                                   reflecting a disproportionate number of people with
basis, because it is a convenient way of making                                                       student debt in this group. While the participation of
transactions.(2)                                                                                      low-income households as borrowers in the overdraft and

Table A
Participation by debt instrument and household income
Per cent

                                  Household income of those reporting income:

                                  Less than        £4,500–          £9,500–         £17,500–         £25,000–         £35,000–           More than         Whole
                                  £4,500           £9,499           £17,499         £24,999          £34,999          £59,999            £60,000           sample

HP agreement                          1                6                 6                 4               16              11               14                  5
Personal loans                       11               10                16                16               36              28               31                 13
Overdraft                             7                4                 9                14               18              13               25                  7
Credit card                           5                6                22                22               33              35               20                 15
Catalogue or mail order               7                9                13                 9                8               8                7                  8
Student loan                          8                1                 2                 3                2               4                2                  3
DSS Social Fund                       4                7                 4                 1                1               0                0                  2
Other loans                           0                2                 4                 3                2               2                0                  2
Any type of debt                     33               29                45                42               62              56               48                 34
Memo: Proportion of
 sample in each income group          8               28                 28               12               10              11                 4              100

Note: Some people have more than one type of debt so the proportion of people with any type of debt is less than the sum of those with each type of debt. Individual
      responses have been weighted to reflect the UK population (see Annex for further details). Bank calculations.

Source: NMG Research Survey.

Fieldwork: October 2003.

(1) The survey also asked about other individual and household characteristics, including household income. Around half
    of those interviewed did not provide information on their household income. While this is not the main purpose of
    the survey, information on income is important in assessing the affordability of debt.
(2) This is different to aggregate unsecured debt figures which include any unsecured debt outstanding at a point of time,
    regardless of whether it bears interest or not. This is discussed further in the box on page 421.

                                                                                                                     The distribution of unsecured debt in the United Kingdom: survey evidence

Table B
Average debt of debtors by debt instrument and household income

                                    Income levels of those reporting income:

                                    Less than         £4,500–            £9,500–        £17,500–          £25,000–         £35,000–            More than         Whole
                                    £4,500            £9,499             £17,499        £24,999           £34,999          £59,999             £60,000           sample

HP agreement                          n.a.          1,600               2,000            3,400              1,400           3,800             3,400              2,500
Personal loans                     2,000            2,000               3,500            4,800              5,300           5,400             5,300              4,400
Overdraft                            700              200                 700            1,000                700             800             1,000                700
Credit card                          800            1,800               1,000              900              2,300           2,800             1,100              1,400
Catalogue or mail order              200              400                 300              300                100             400                n.a.              300
Student loan                       5,600            6,500               4,000            4,500              6,100           4,300                n.a.            6,300
DSS Social Fund                      300              300                 200               n.a.              n.a.             n.a.              n.a.              200
Other loans                           n.a.            300                 500            6,100                n.a.             n.a.              n.a.            1,400
Any type of debt                   2,400            1,800               2,400            3,800              5,100           5,600             6,000              3,500

Source: NMG Research Survey.

Fieldwork: October 2003.

Bank calculations. All figures rounded to nearest £100.

n.a. indicates that the number of debtors in this category is too small for the average to be sensibly calculated. Figures in italics are indicative only as the number of respondents
in these categories is less than ten.

credit card markets is relatively low, the average amount                                                  population. Moreover, the figures are not exactly
they borrow using these products is relatively high. For                                                   comparable because some surveys, such as that by NMG
example, the average overdraft among those with income                                                     Research, ask about the borrowing of individual adults
of less than £4,500 is close to the overall average, while                                                 while others consider the position of households.
the average credit card debt of those with household                                                       Evidence from the BHPS, which considers both, suggests
income of between £4,500 and £9,499 is above the                                                           that participation rates are about 8 percentage points
overall average. By contrast, borrowing is strongly                                                        higher for households than individuals. This is not the
increasing with income for personal loans and (to a                                                        only difference in that some surveys prompt the
lesser extent) hire purchase (HP) agreements, possibly                                                     interviewee about the types of debt they may have.(1)
reflecting their use as a method of financing irregular                                                    Taking these differences into account suggests that, with
large-ticket income-related spending. For these                                                            the exception of the KPMG and Citizens Advice surveys,
instruments, borrowers have little discretion to increase                                                  there is a consensus that around 40%–50% of
their debt without the permission of lenders. On                                                           households and 30%–40% of adults have some form of
average, borrowing through student loans, personal                                                         unsecured debt. The probable cause of the high rates of
loans, HP agreements and credit cards is for larger                                                        participation found by the KPMG and Citizens Advice
amounts than through overdrafts, catalogue or mail                                                         surveys is that they do not specifically exclude loans that
order finance and DSS social fund loans. The overall                                                       people expect to pay off in full at the end of the month
average debt of borrowers is £3,500.                                                                       in question.(2)

                                                                                                           The average debt of debtors in the NMG Research
The averages in the individual cells in Table B need to be                                                 Survey is also broadly consistent with the findings of
treated with care because the sample size is small in                                                      other surveys. It is 8% higher than the average debt of
some cases (particularly for ‘other loans’), although the                                                  debtors in the 2000 BHPS. This difference is smaller
overall averages for income groups and types of loans are                                                  than might be expected given that the aggregate level of
likely to be relatively reliable. More generally, the                                                      unsecured debt was 35% higher in October 2003, the
robustness of the figures on participation and average                                                     date of the NMG Research Survey, than it was in
debt levels can be assessed by comparing them with                                                         September 2000, when the BHPS was undertaken. This
other evidence. Table C summarises information on                                                          difference could reflect sampling error. The NMG
participation and average debt levels from other surveys.                                                  Research estimate is less than the average debt of
Some difference is to be expected simply because each                                                      £4,600 of individual debtors in the FSA survey carried
survey is based on a small sample of a much larger                                                         out in 2002. On a household basis, the NMG Research
(1) The Survey of Low Income Families (SOLIF), analysed by Bridges and Disney (2004, forthcoming) includes loans from
    employers, family and friends and the ‘tally man’ in addition to loans from financial institutions.
(2) Some of the surveys also provide information on participation by type of debt instrument, which may be used to check
    the robustness of our findings. Kempson (2002) and FSA (2003) both find that around 19% of households have credit
    card debt outstanding, slightly higher than our estimate of 15% for adults. They both find that around 8% of
    households have overdrafts and some 15% have personal loans, close to our findings for adults.

Bank of England Quarterly Bulletin: Winter 2003

Table C
Evidence from surveys(a)
                                   Date of survey     Sample size   Unit of analysis   Excludes debt        Additional                   Percentage with            Average debt
                                                                                       paid off at          types of debt                unsecured debt             of debtors (£)
                                                                                       end of month         mentioned
Berthoud and Kempson               1989               2,212         Household            Yes                Store cards                         48                  Not given
BHPS                               1995               9,249         Individual           Yes                n.a.                                35                  2,088
BHPS                               1995               5,031         Household            Yes                n.a.                                43                  2,872
Bridges and Disney                 1999               4,659         Low-income           No                 Loans from                          49                  Not given
                                                                    families                                employers, friends,
                                                                                                            ‘tally man’
BHPS                               2000               9,006         Individual           Yes                n.a.                                35                  3,242
BHPS                               2000               4,916         Household            Yes                n.a.                                43                  4,375
Kempson                            2002               1,647         Household            Yes                Store cards/                        47                  3,500
FSA                                2002               3,200         Families             Yes                Rent arrears,                       Not given           4,600 (b)
                                                                                                            store loan,
                                                                                                            store card,
                                                                                                            car loan
KPMG                               2003               2,304         Individual           No                                                     71 (c)              Not given
Citizens Advice                    2003               1,986         Individual           No                 Includes some secured               74                  3,900
                                                                                                            loans and
NMG Research                       2003               1,950         Individual           Yes                n.a.                                34                  3,500
(a) See references for more details of the surveys.
(b) Individual average.
(c) Based on Bank calculations.

estimate of the average debt of debtors is equivalent to                                 Table D
£4,700, if the same relationship between the debt of                                     The distribution of the amount owed by debtors
individuals and households applies as in 2000. This is                                   Per cent
                                                                                                                   NMG               Citizens         KPMG           Kempson
higher than the average figure of £3,500 given in                                                                  Research          Advice
Kempson (2002). The average value of debt of                                             Under £1,000                     43               46              25            67
                                                                                         £1,000–£1,999                    14               13
individuals is similar to the Citizens Advice estimate of                                £2,000–£2,999                     7                7              33
£3,900, although this is not strictly comparable as it                                   £3,000–£3,999                     5                6                            17
                                                                                         £4,000–£4,999                     5                5
does not exclude balances to be paid off at the end of                                   £5,000–£7,499                     8                4              20
                                                                                         £7,500–£9,999                     5                3                             7
the month, raising the participation rate substantially.(1)                              £10,000–£14,999                   9                6              17            10
                                                                                         £15,000–£19,999                   2                3
The consistency of the survey-based figures with the                                     £20,000 or more                   2                2               7
aggregate statistics is discussed in the box on                                          Note: KPMG and Kempson figures have been recalculated by the authors as proportions
page 421.                                                                                      of debtors. Citizens Advice figures have been adjusted to take account of refusals.
                                                                                               Figures may not sum to 100 due to rounding.

Distribution of unsecured debt                                                           KPMG survey is distinctive in that it is an online survey,
Table D shows the amounts owed by debtors, using                                         whereas the others are carried out face to face. It is
information from the NMG Research Survey. This is                                        representative in terms of gender, age, region and social
compared with other surveys containing similar                                           class, but it may be that the anonymity offered by an
information.                                                                             online survey encourages people to reveal more about
                                                                                         their indebtedness. It could also be that an online
The NMG Research Survey shows most debtors owe                                           survey attracts a sample of participants more likely, for
relatively small amounts, with close to half of debtors                                  whatever reason, to have larger debts.
owing less than £1,000 and nearly two thirds owing less
than £3,000. But there is wide variation in the amounts                                  The unequal distribution of debt across respondents in
owed and 26% of debtors owe more than £5,000.(2)                                         the NMG Research Survey suggests that a large
These figures are close to those of other surveys,                                       proportion of outstanding unsecured debt is
although the KPMG survey finds higher debt levels. The                                   concentrated among relatively few people. If the survey
(1) There is also a broad degree of consistency across the surveys in estimates of the average amounts of debt for
    individual types of debt. For outstanding credit card balances, Kempson finds households owe an average of nearly
    £1,600 while the FSA finds families owe £2,200, both broadly consistent with the NMG Research estimate of £1,400
    for adults. Similarly, average personal loans are estimated to be over £5,500 by the FSA and £5,000 by Kempson,
    compared with our estimate of £4,400 for adults. Overdrafts are also of a similar order across the surveys, with the
    average in Kempson’s sample put at £450 compared with £900 in the FSA sample and £700 here. Interestingly,
    Kempson notes that the average overdraft in the 1989 survey reported by Berthoud and Kempson (1992) was £1,700 in
    2002 prices, whereas the average credit card balance in 1989 was £550 in 2002 prices, indicating a broad shift in the
    method of borrowing over the past 14 years. The average student loan debt of £6,300 in the NMG Research Survey is
    consistent with Callender and Wilkinson (2003) who find that the average student loan debt of students was £5,500 at
    the end of the 2002–03 academic year. This is of course much higher for final-year students.
(2) This is equivalent to 6% of respondents, including those who do not reveal how much unsecured debt they have, and
    9% of respondents for whom the level of debt is known or estimated.

                                                                                          The distribution of unsecured debt in the United Kingdom: survey evidence

                                              Consistency with aggregate figures

  While the NMG Research Survey evidence is broadly                                (2003) survey suggests that around half of all people
  consistent with other similar surveys, there is a                                who use credit cards aim to pay them off in full at the
  substantial difference between the grossed-up                                    end of the month.(2) Unpublished figures from the
  amount of unsecured debt claimed in survey                                       British Bankers’ Association suggest that about three
  responses and that reported in official statistics.(1)                           quarters of Visa and Mastercard affiliated credit card
  At the end of September, total UK consumer credit                                balances bear interest.
  was £168.4 billion, whereas the grossed-up figure
  from the NMG Research Survey was only                                            Second, despite the consensus between surveys, it
  £56.8 billion.                                                                   may be that respondents have a persistent tendency
                                                                                   to underreport their debt, perhaps because they do
  There are a number of ways of reconciling these                                  not think of goods being paid for in instalments as
  figures.                                                                         debt. There could also be confusion within
                                                                                   individual families as to the amount borrowed by
  First, there is a difference between what the surveys                            other family members. This should be avoided in the
  and official figures intend to cover. Official estimates                         NMG Research Survey, which asked people about
  are derived from lenders and cover all forms of                                  their own borrowing. To the extent that people
  consumer credit outstanding at a particular date,                                included the debts of other family members in their
  including that which does not bear interest. By                                  replies, this would have led to an over rather than an
  contrast, survey respondents are usually asked not to                            underestimate of the total when grossed up by the
  include credit card and other bills being paid off in                            number of adults.
  full in the month of interview. So part of the
  difference between survey and official figures is that                           There is some evidence that the gap between the
  surveys are stating what people perceive to be their                             lender-based and borrower-based estimates of
  normal stock debt position, whereas official aggregate                           aggregate unsecured debt has been increasing over
  figures are also picking up credit used temporarily to                           time. Using information from the BHPS, the
  make transactions. This is an issue particularly for                             proportion of the official, lender-based aggregate
  credit card borrowing, given that many people now                                estimate of unsecured debt that is accounted for
  use credit cards for transactions in preference to cash                          by survey-based information declined from 52% in
  and other means of payment, either because of                                    1995 to 41% in 2000. According to the NMG
  greater convenience or to take advantage of insurance                            Research Survey, this has fallen further to 34% in
  and cash-back special offers. The Citizens Advice                                2003.
  (1) Note that this does not apply to BHPS estimates of labour income, housing wealth and secured debt which, when aggregated, largely agree with
      aggregate estimates. Financial assets, however, are substantially underrecorded.
  (2) The recent CAB survey asked those in their sample that had at least one credit or store card (around 1,200) how much they usually pay off each
      month and found that: 2% pay off less than the minimum payment, 10% make the minimum payment, 29% pay more than the minimum payment but
      less than the full balance, 49% pay the full balance, 9% have no outstanding balance, 2% refuses or do not know.

results are grossed up to the UK adult population, then                            debt and less income are most likely to experience debt
of the total unsecured debt of £56.8 billion, around                               problems. In general, it shows relatively few cases where
£29 billion is owed by the 4.3% of the population with                             debt levels are high relative to household income. For
individual debt of over £10,000.                                                   example, of the 770,000 individuals with debt over
                                                                                   £10,000 whose income is known, only 185,000 have
Distribution of debt by household income of                                        household income of less than £17,500, while 340,000
the borrower                                                                       have income in excess of £35,000.

Table E looks at the breakdown of debt levels according
                                                                                   Characteristics of borrowers and those who
to the household income of the borrower. This is
                                                                                   report debt to be a burden
derived from the NMG Research Survey and grossed up
to the UK adult population. It provides a guide to the                             The NMG Research Survey also provides qualitative
affordability of debt, given that individuals with more                            evidence, comparable to that in the BHPS, of the extent

Bank of England Quarterly Bulletin: Winter 2003

Table E
The distribution of unsecured debt and income (millions, estimates grossed up from survey respondents)
                                    Household income:

                                    Less than        £4,500–          £9,500–      £17,500–       £25,000–      £35,000–         More than     Missing          Whole
                                    £4,500           £9,499           £17,499      £24,999        £34,999       £60,000          £60,000                        sample

None                                 1.2              4.3              3.6             1.6             0.9          1.1            0.4             14.5           27.4
Under £1,000                         0.3              0.9              1.1             0.3             0.2          0.1            0.1              1.3            4.1
£1,000–£4,999                        0.1              0.3              0.8             0.3             0.3          0.4            0.1              0.7            3.0
£5,000–£9,999                        0.1              0.0              0.2             0.1             0.3          0.2            0.1              0.2            1.2
£10,000 or more                      0.0              0.1              0.1             0.1             0.2          0.2            0.1              0.4            1.2
With debt but missing value          0.2              0.4              0.6             0.3             0.5          0.4            0.1              2.5            4.9
Missing                              0.1              0.6              0.4             0.2             0.1          0.1            0.1              3.8            5.4
Total                                1.9              6.6              6.7             2.8             2.4          2.6            0.8             23.4           47.2
Source: NMG Research Survey.

Fieldwork: October 2003.

Bank calculations.

to which individuals consider the repayment of their                                              debt to be a heavy burden, 22% say that it is somewhat
unsecured debt to be a burden to their household. This                                            of a burden and the remainder do not consider it a
is useful in making comparisons with previous years and                                           problem. The survey enables us to examine the
in assessing the consistency of answers in the survey. It                                         characteristics of those who report different degrees of
finds that 10% of individuals consider their unsecured                                            financial distress. This is summarised in Table F.
Table F
The characteristics of adults with different degrees of debt problems
                           Characteristics of each group:                                     Contribution of group to overall shares:

                           Share of   Participation Mean                     Proportion of    Share of those   Share of those     Share of those     Share of those      Mean debt
                           population rate          debt to                  debtors          with positive    reporting debt     reporting debt     reporting debt      for those
                                                    income                   reporting        debt             to be no           to be somewhat     to be a heavy       reporting
                                                    ratio of                 debt to be a                      problem            of a problem       burden              debt to be
                                                    debtors                  heavy burden                                                                                a heavy

Overall                                         34          0.24                  10              34                  68                 22                10             6,900

Age group
15–24                          15               33          0.45                  11              16                  14                 18                17             5,300
25–34                          19               54          0.19                  13              29                  26                 33                37             6,600
35–44                          18               50          0.18                  10              25                  25                 25                25             5,900
45–54                          16               39          0.19                   9              17                  18                 15                15            12,400
55–64                          13               26          0.13                   5               9                  11                  6                 5            Not given
65 plus                        20                7          0.75                   5               4                   6                  2                 2            12,600

Income group
Less than £4,500                4               33          1.03                  24               4                   4                  3                10             4,300
£4,500–£9,499                  14               29          0.29                  15              12                   9                 18                18             3,300
£9,500–£17,499                 14               45          0.19                  13              19                  18                 20                25             6,700
£17,500–£24,999                 6               42          0.18                   7               8                   8                  7                 5            15,800
£25,000–£34,999                 5               62          0.17                   7              10                  11                  8                 7             9,700
£35,000–£60,000                 5               56          0.13                   0              10                  11                  9                 0               n.a.
£60,000 plus                    2               48          0.07                  11               3                   3                  1                 3            13,500
Missing income                 50               26           n.a.                  9              35                  37                 34                32             7,300

Social class
AB                             19               36          0.14                   6              19                  21                 18                11             7,500
C1                             25               41          0.35                   7              30                  32                 30                21            14,500
C2                             23               33          0.26                   8              22                  23                 21                17            12,800
DE                             34               30          0.20                  17              29                  25                 32                50             2,400

Debt group (for debtors only)
Under £1,000             43                                                        4              43                  49                 35                18               500
£1,000–£1,999            14                                                       10              14                  13                 15                15             1,300
£2,000–£2,999             7                                                       13               7                   7                  6                10             2,200
£3,000–£3,999             5                                                        8               5                   3                 14                 5             3,300
£4,000–£4,999             5                                                       13               5                   6                  2                 8             4,000
£5,000–£7,499             8                                                        8               8                   7                 10                 6             5,500
£7,500–£9,999             5                                                       11               5                   5                  3                 6             8,000
£10,000–£14,999           9                                                       23               9                   6                 11                20            12,200
£15,000–£19,999           2                                                       16               2                   1                  2                 3            18,000
£20,000 or more           2                                                       40               2                   2                 11                 9            23,800

With financial assets          35               39             0.21                5              40                  46                 33                19             6,400

Housing status
With mortgage                  33               47          0.17                   4              45                  50                 44                17            17,700
Own outright                   26               18          0.28                   5              14                  17                  9                 7             9,600
Rented local authority         23               30          0.24                  20              20                  18                 17                41             2,200
Rented private                 10               42          0.49                  17              12                   9                 18                21            10,200
Housing association             7               45          0.18                  18               8                   6                 11                15             7,800
Source: NMG Research Survey.
Fieldwork: October 2003.

Bank calculations.
Figures may not sum to 100 due to rounding.

                                                                                               The distribution of unsecured debt in the United Kingdom: survey evidence

By age, 37% of those who find debt to be a heavy burden                                 accommodation, compared with 20% in the debtor
are between 25 and 34. This is about double their                                       population as a whole.
weight in the grossed-up sample as a whole and also
higher than their share in the debtor population. These                                 These figures on the proportion of people reporting
individuals do not have a particularly high unsecured                                   debt to be a heavy burden indicate that a significant
debt to income ratio, but their finances are likely to be                               minority of debtors are struggling with their unsecured
put under strain by mortgage borrowing and other                                        debt. This is consistent with other evidence from debt
financial demands at a stage in their life when they are                                counsellors and the Citizens Advice Bureaux.
starting families and buying homes.
                                                                                        Comparisons over time
By income, 28% of those who find unsecured debt to be
                                                                                        One of the key reasons for asking the same questions in
a heavy burden have household income of less than
                                                                                        our survey as in the BHPS is to ensure, as far as possible,
£9,500. While their participation rate is relatively low,
                                                                                        that the results are comparable over time. These
they have an above-average unsecured debt to income
                                                                                        combined results show that there has been no overall
ratio. Over half of those who say that unsecured debt is
                                                                                        change in the participation rate between 1995 and
a heavy burden are from the DE social class.(1) This is
                                                                                        2003. This confirms Kempson’s (2002) analysis of the
much higher than their 29% representation in the
                                                                                        1989 to 2002 period that ‘the large increase in
debtor population. Nonetheless, the average level of
                                                                                        consumer borrowing is not due to a larger proportion of
debt for those from low income or social class
                                                                                        the population owing money’. This may seem surprising
households who report their debt to be a heavy burden
                                                                                        in view of the substantial increase in credit cards in
is low relative to that owed by other groups.
                                                                                        circulation in recent years, but this does not necessarily
                                                                                        imply that a larger proportion of people borrow using
By debt level, over 32% of those whose debt is perceived
                                                                                        these cards.(2) Moreover, Kempson finds that greater use
to be a heavy burden have unsecured debt of over
                                                                                        of credit cards has substituted for other forms of credit
£10,000. This is substantially larger than their 13%
                                                                                        such as mail order catalogues and hire purchase
share in the population of debtors. The average debt of
                                                                                        arrangements. Chart 1 plots the participation rate for
people who say it is a heavy burden is £6,900, compared
                                                                                        different age groups between 1995 and 2003. This
with £3,900 for those for whom it is somewhat of a
                                                                                        shows very little change in participation rates across age
burden and £2,900 for those who say it is not a
                                                                                        groups in recent years. It also suggests that the NMG
problem. It is not surprising that those who report their
unsecured debt to be a heavy burden also tend to have                                   Chart 1
more of it. This suggests that unsecured debt in                                        Unsecured debt participation rates by age group
aggregate is to some extent concentrated among those                                          BHPS 1995
who experience difficulties in repaying it. Almost 20%                                        BHPS 2000
                                                                                              NMG 2003
of unsecured debt is owed by those who consider it a                                                                                            Per cent
heavy burden, and 25% by those who say it is somewhat
of a problem.                                                                                                                                              50

It is clear from the survey that unsecured debt is less of                                                                                                 40

a problem for those with other assets. Only 19% of
those reporting unsecured debt to be a heavy burden
have financial assets compared with 40% in the debtor                                                                                                      20

population as a whole. Only 17% of those who report
unsecured debt to be a heavy burden have a mortgage
compared with 45% in the debtor population as a
whole. By contrast, 41% of those for whom debt is a                                         16–24      25–34     35–44      45–54     55–64   65+

heavy burden live in local authority rented                                             Sources: BHPS, NMG Research and Bank calculations.

(1) Social class is defined as follows: AB: Professionals, directors, self-employed people employing more than 25 staff,
    employees in senior positions with professional qualifications and/or a degree; C1: Office workers without a degree,
    employees in junior positions with professional qualifications and/or a degree, self-employed people employing
    1–24 staff, students in full-time education; C2: qualified skilled manual workers; DE: semi-skilled and unskilled
    manual workers, shop assistants, cleaners, unemployed, retired on state pension only.
(2) The number of credit cards issued rose from 28.3 million in 1995 to 58.8 million in 2002 according to APACS (2003).

Bank of England Quarterly Bulletin: Winter 2003

Research Survey is comparable with the earlier BHPS                                      Chart 3
results.                                                                                 Trends in the burden of debt
                                                                                             Heavy burden
The surveys suggest that the average unsecured                                               Somewhat of a burden
debt to income ratio of debtors doubled between 1995                                         Not a problem
                                                                                                                                                                          Per cent
and 2003, with unsecured debt levels rising from 12% to
                                                                                                58         62         62        60        63       62        64               68     70
24% of income.(1) The increase between 1995 and 2000
was fairly well-spread across the income distribution,                                                                                                                               60

albeit with the largest increase in the lowest-income                                                                                                                                50
group. By contrast, the increase since 2000 has been
concentrated in households with income of £17,500 and                                       31        29         27        30         27       29       27                22
above. Indeed there has been a sharp fall in unsecured                                                                                                                               30

debt among the lowest-income group since 2000.                                                                                                                                       20
Chart 2 shows average unsecured debt levels by income                                      11        10         11         9         10        9        9                10
group in the 1995 and 2000 waves of the BHPS and in
the 2003 NMG Research Survey.                                                               1995          96     97            98      99      2000         01      02        03

                                                                                         Sources: BHPS, NMG Research and Bank calculations.
Chart 2
Mean debt by household income groups                                                     to be somewhat of a burden, but it is likely to be
                                                                                         associated with the fall in effective interest rates on
      BHPS 1995
      BHPS 2000                                                                          unsecured debt and the fact that, in aggregate,
      NMG 2003                                             Debt (£)                      unsecured debt has remained small relative to household
                                                                                         Changes in the concentration of debt

                                                                                         There is some evidence that the concentration of debt
                                                                                         among riskier borrowers has increased over time, despite
                                                                      3,000              the fact that the proportion of people reporting debt
                                                                                         problems has declined. Chart 4 shows that the average

                                                                                          Chart 4
                                                                                          Changes in average debt by attitude to debt
  Income (£):
  Up to 4,499      11,500–17,499 25,000–34,999      60,000+
           4,500–11,499    17,500–24,999 35,000–59,999                                               2000

Sources: BHPS, NMG Research and Bank calculations.

Despite the increase in average debt levels and                                                                                                                                          7,000

debt to income ratios, comparable figures suggest that                                                                                                                                   6,000
this has not added to the proportion of households
experiencing debt problems. Chart 3 shows that the
proportion of debtors reporting that unsecured debt is
not a problem has increased from 58% in 1995 to 68%                                                                                                                                      3,000

in 2003, while the proportion reporting that it is                                                                                                                                       2,000
somewhat of a burden has declined from 31% to 22%
over this period. The proportion reporting debt to
be a heavy burden has been broadly stable at around                                              Not a problem                      Somewhat of a                 Heavy burden
10%. It is not clear from this evidence what has caused                                                                               burden

the decline in the proportion of people reporting debt                                   Sources: BHPS, NMG Research and Bank calculations.

(1) This is broadly consistent with the increase in the aggregate unsecured debt to income ratio from 12.6% to 21.9% of
    household income between 1995 Q2 and 2003 Q2 although, as pointed out in the box on page 421, the level of
    aggregate debt is higher than is implied by the survey evidence. The level of aggregate income is also higher because
    the income of non-debtors is included.

                                                                The distribution of unsecured debt in the United Kingdom: survey evidence

amount of debt held by individuals who consider it to be   ●    The unequal distribution of debt across the sample
a heavy burden has increased by more than it has for            suggests that a large proportion of outstanding
those who are more relaxed about their unsecured debt.          unsecured debt is concentrated among relatively
This reflects a sharp increase in the unsecured                 few people. Around half of the identified aggregate
debt to income ratio of those reporting debt to be a            obtained by grossing up the survey results is owed
heavy burden and implies that the level of borrowing at         by around 4.3% of adults with individual debt of
which debt becomes a problem is higher now than in              over £10,000.
the recent past. It also suggests that debt has become
more concentrated among riskier borrowers.                 ●    About 10% of debtors say that their debt is a heavy
                                                                burden. Around half of these people are in social
Summary                                                         class DE, around 40% live in local authority rented
The main results of the NMG Research Survey analysed            accommodation, few have other assets, and a
in this article are as follows:                                 disproportionate number are between 25 and 35.

●    Around 34% of adults have some type of unsecured      ●    There does not appear to have been any upward
     debt. Participation in the unsecured debt market           trend in the participation rate over time. But the
     is greatest among the higher-income groups. The            debt to income ratio of borrowers has doubled
     participation rate peaks at 62% for those with             between 1995 and 2003. Since 2000, the increase
     annual household income of between £25,000 and             has been concentrated among those with
     £34,999. It is about half this rate for those with         household income above £17,500.
     household income below £9,500.
                                                           ●    There has been an increase since 1995 in the
●    Unsecured debt is strongly related to household            proportion of households who consider their debt
     income, with average debt of £1,800 for debtors            not to be a burden despite the general rise in
     with household income in the range                         unsecured debt. This may reflect falling interest
     £4,500–£9,499 and £6,000 for those with                    rates on unsecured debt and the relatively small
     household income in excess of £60,000. The                 share of unsecured debt in household sector
     overall average debt of borrowers is £3,500. The           wealth. But the debt levels of those reporting it to
     average for households is estimated at about               be a burden have increased disproportionately.
                                                           In summary, the recent growth of unsecured debt has
●    The aggregate amount of unsecured debt implied        not as yet caused widescale debt problems. Moreover,
     by surveys of borrowers is substantially less than    the survey evidence suggests that most unsecured
     lender-based official figures. This partly reflects   borrowing is arranged through personal loans and HP
     the exclusion of debt used for transactions from      agreements where borrowers have little discretion to
     borrower-based surveys.                               increase their debt without the permission of lenders.
                                                           There is, however, evidence of large unsecured
●    Most debtors report that they owe relatively small    borrowing relative to income by a small proportion of
     amounts, with close to half of debtors owing less     individuals. This may not necessarily be a problem
     than £1,000 and two thirds owing less than            currently, although it could become one if these
     £3,000. Nevertheless, there is considerable           borrowers experienced adverse financial shocks,
     variation in the amounts owed and 26% of debtors      such as unexpected increases in interest rates or falls in
     report that they owe more than £5,000.                income.

Bank of England Quarterly Bulletin: Winter 2003


NMG Research runs a monthly omnibus survey,                  ●       Can you please tell me how much money you
MarketMinder, of the investments, savings and pensions               currently owe to the following types of lender (but
markets. To compile this omnibus survey, a nationally                please exclude any borrowing that will be fully
representative sample of 2,000 adults aged 15 and over               repaid at the end of this month, eg the settling of
are interviewed each month by Ipsos Capibus.                         your credit card in full).
Interviews are conducted face to face, in respondents’
homes, using Computer Assisted Personal Interviewing.        1       Hire purchase agreement.
Interviews are carried out in around 120 areas of the        2       Personal loan.
country selected using a two-stage stratified random         3       Overdraft.
location design. Different local areas are selected for      4       Credit card.
each month.                                                  5       Catalogue or mail order agreement.
                                                             6       Student loan.
In order to correct for minor deviations in terms of the     7       DSS social fund loan.
generated sample profile week on week, Capibus uses a        8       Any other loans.
rim-weighting system which weights to their National
Readership Survey defined profiles for age, social grade,    ●       To what extent is the repayment of such debts and
region and working status—within sex.                                the interest a financial burden on your household?
                                                                     Would you say it is:
Three questions on unsecured debt were added to this
omnibus for interviews carried out between 3 and             1       A heavy burden.
9 October 2003. The questions were:                          2       Somewhat of a burden.
                                                             3       Not a problem.
●       I would like to ask you now about financial
        commitments you may have apart from mortgages        Table 1 summarises the number of responses to the
        and housing-related loans. Do you currently owe      questions about debt and household income.
        any money on the following types of loan or credit
        agreement? (please exclude any borrowing that will
        be fully repaid at the end of the month, eg the
        settling of your credit card in full).
                                                             Table 1
                                                             Summary of survey responses
1       Hire purchase agreement.
                                                                                  Has no debt Declares debt Has some debt Refuses   Total
2       Personal loan.                                                                        level         but does not
                                                                                                            say how much
3       Overdraft.
                                                             Declares income          496         285           96          62       939
4       Credit card.                                         Does not
                                                              declare income          637         120          100         154      1,011
5       Catalogue or mail order agreement.                   Total                  1,133         405          196         216      1,950

6       Student loan.                                        Source: NMG Research Survey.

7       DSS social fund loan.                                Fieldwork: October 2003.

8       Any other loans.                                     Bank calculations.

                                                                     The distribution of unsecured debt in the United Kingdom: survey evidence


APACS (2003), Plastic Card Review.

Berthoud, R and Kempson, E (1992), Credit and debt: the PSI Report, Policy Studies Institute, London.

Bridges, S and Disney, R (2004), ‘Use of credit and arrears on debt among low income families in the United
Kingdom’, Fiscal Studies, forthcoming.

Callender, C and Wilkinson, D (2003), ‘2002/03 student income and expenditure survey: student’s income,
expenditure and debt in 2002/03 and changes since 1998/99’, Department for Education and Skills’, Research Report

Citizens Advice (2003), Financial over-commitment survey, Research Study conducted by MORI for Citizens Advice,
July 2003.

Cox, P, Whitley, J and Brierley P (2002), ‘Financial pressures in the UK household sector: evidence from the British
Household Panel Survey’, Bank of England Quarterly Bulletin, Winter, pages 410–19.

Financial Services Authority (2003), Financial Risk Outlook.

Kempson, E (2002), Overindebtedness in Britain: a report to the Department of Trade and Industry.

KPMG (2003), Debt crisis—an attempt to make ends meet or a frivolous approach to spending?, Press Notice describing
survey carried out by YouGov on behalf of KPMG.